Many in-home daycare providers wonder about the home office deduction. This article will explore the rules for qualifying for the deduction, and how to calculate the deduction.
Do You Qualify?
You qualify for the deduction if you are a licensed daycare provider. If you are not licensed, you can still qualify for the deduction but only if you are not required to be licensed under state law. If you ARE required to be licensed but are not licensed, then you don’t qualify for the deduction.
What Expenses Qualify
Almost any expense associated with your home can qualify for a deduction. Examples include:
- Mortgage interest or rent.
- Property taxes.
- Utilities (BUT NOT THE COST OF THE FIRST PHONE LINE INTO YOUR HOME).
- Maintenance and upkeep.
Calculating the Deduction
There are two percentages you need to know: the square-footage percentage and the time percentage.
- The square-footage percentage is the percentage of your home that is used as a daycare. So if you use 750 square feet of your 1,000 square foot house for your daycare, your percentage is 75%. (NOTE: any part of your house that is used even a little bit for your daycare counts. So if you sometimes do laundry for your daycare, you can count the square footage of the laundry area. Some of the daycares I deal with have a 100% percentage in this part.)
- The time percentage is calculated as: number of hours your house was used as a daycare, divided by the number of hours in the year. So if your home is used 2,000 hours, your percentage would be 2,000/8,760 = 22.8%.
- Then, you multiply your square-footage percentage by the time percentage. In our example, this would be 75% x 22.8% = 17.1%.
- The deduction is generally limited to no more than the amount of income from your business.
- If a particular area of your home is used 100% for daycare purposes and never for personal purposes, the calculation is different.
- For anyone reading this who is NOT an in-home daycare: this discussion ONLY applies to in-home daycares; the home-office deduction rules are totally different for other types of businesses.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”